Employee ownership trusts (EOTs) are an increasingly common way for sellers of closely held companies to transition out of ownership. In an EOT, the company sets up a special-purpose trust to own shares that the company (not employees) buys from the seller using their future profits to repay a note, often from the seller or a combination of the seller and a bank. The trust is designed to hold the shares in perpetuity. The employees are generally not owners but have a claim on company profits through dividends or conventional profit shares. EOTs are often chosen instead of an employee stock ownership plan (ESOP), which offers tax benefits but is much more costly and complex than an EOT. This book helps decision-makers decide whether an EOT is the right approach for their company.
Table of Contents
1. How ESOPs Compare to EOTs
2. A Simpler Path Toward Employee Ownership: Key EOT Benefits
3. Setting Up the Trust
4. EOT Financing
5. Governance and Ownership Culture in EOTs
6. Putting the Ownership Back in Employee Ownership Trusts
7. EOT Case Studies
Excerpts from Chapter 2, "A Simpler Path Toward Employee Ownership"
An EOT differs from an ESOP in one primary way: an EOT is not a retirement plan. While ESOP participants enjoy the benefit of seeing their accounts grow over the time they work for their employer, they won’t fully realize the fruits of their labor until some time after they leave their jobs or retire due to legal rules. However, in EOTs, employees receive financial rewards, typically through a profit-sharing plan, while working at the company. At the same time, nothing prevents an EOT company’s board of directors from using a portion of the surplus available to the company in any given year for additional employer contributions to an ERISA-based plan, such as a 401(k) plan.
An EOT conveys ownership in the company to employees, just as an ESOP does. However, there is typically no equity component (no individual employee share accounts) with an EOT. The standard practice is that when employees leave the company, they do not receive any compensation relative to the value of the company. As is said in the United Kingdom, participants in an EOT are “naked in, naked out.” This means that employees do not buy into the plan when they enter the company and are not bought out when they leave. This is just the same as in any professional partnership, like a law firm, architectural firm, or medical practice. In some cases, a nominal buy-in and fixed buyout might be involved in such a firm. But the main benefit of participating in such a professional partnership is to participate in the profits, not the equity growth of the firm.
In a broader sense, EOTs offer five significant advantages for any entrepreneur looking to streamline the transition to an employee-owned company: privacy, flexibility, low cost, simplicity, and sustainability.
